Duties and responsibilities of a Company Director
Directors of UK private limited companies frequently ask; What is my role as Director? what duties am I subject to? And how can I best comply with those duties?
Your role is to oversee the day-to-day management of the company and ensure the company complies with its statutory obligations. To ensure you fulfil your role effectively, directors are subject to general duties imposed by the Companies Act 2006. Consequently, this article explores those fundamental duties.
General duties under the Companies Act 2006
Under the Companies Act 2006, a director is subject to a number of duties.
- To act within powers;
- promote the success of the company;
- exercise independent judgment;
- exercise reasonable care, skill and diligence;
- avoid conflicts of interest; and
- declare interests in proposed or existing transactions or arrangements with the company.
1 | Act within powers
Firstly, to act in accordance with the company’s constitution. And secondly, to only exercise powers for the purposes for which they were given.
2 | Promote the success of the company
A director must act in a way they consider to be most likely to promote the success of the company. For the benefit of its members as a whole not for just its stakeholders. In doing so, directors must have regard to the:
- likely consequences of any decision in the long term;
- interests of the company’s employees;
- need to support the company’s business relationships with suppliers, customers and others;
- impact of the company’s operations on the community and the environment;
- desirability of the company maintaining a reputation for a high standard of business conduct; and
- need to act fairly as between members of the company.
The above is not an exhaustive list and is merely designed to assist the board of directors to make decisions in good faith. Ultimately, what constitutes “success” will be subjective for each company however these factors help to assist in making responsible business decisions.
3 | Exercise independent judgement
Likewise you are expected to exercise independent judgement and make your own decisions. Nevertheless, this does not prevent you from acting in accordance with the company’s constitution or an agreement the company has entered into.
This duty does not stop you from seeking advice or delegating in respect of a particular decision. However, what is required is that the final judgement is your own.
4 | Exercise reasonable care, skill and diligence
In other words, to exercise the same care, skill and diligence that would be exercised by a reasonably diligent person with:
- general knowledge and skill expected of a person carrying out the functions of a director; and
- the general knowledge, experience and skills that you possess.
It is important to note that where a director has particular skill or personal experience, such as a professional qualification. The standard expected is higher than that required of a person without these skills.
5 | Avoid conflicts of interest
Avoiding situations where there may be a conflict of interest is a common concern for many directors. As such, the Companies Act states that a director must avoid a situation in which he has, or could have, a direct or indirect interest that conflicts, or may conflict, with the interest of the company.
This duty applies in particular to the exploitation of property, information or opportunity and it is irrelevant whether the company could take advantage of it. It can include situations where:
- you are a shareholder of the company and also a director for a major shareholder of the company; or
- if the situation involves a “connected person” eg a close family member.
6 | Declare interest in proposed or existing transactions or arrangements
In light of the above, it is vital that you consult with the board of directors when you think there may be a potential conflict situation. The board may be granted power by the company’s articles of association to authorise the conflict when a proposed transaction is to be voted upon. For certain transactions involving “substantial property”, the board can seek approval of the shareholders.
In any conflict situation, you must declare the nature and extent of that interest to the board of directors before the transaction is entered into. However, this duty is not infringed if:
- the situation cannot reasonably be regarded as likely to give rise to a conflict of interest; or
- if the other directors are already aware (or ought reasonably to be) aware of it.
What if I am unsure about whether I am complying with my duties?
Finally, if you are unsure about your compliance with your duties as director in any situation, our corporate team at LCF are here to help. We can advise you on all aspects of director’s duties, including how to tackle potential conflicts of interest or how you can best comply with your duties.
We will listen and get to the heart of the matter to achieve the best outcome for you. Call us today on 0113 244 0876.
Her clients include owner managed businesses specifically suppliers into the large retailers for whom she has reviewed and drafted terms and conditions, framework agreements and outsourcing agreements.